Chart Advisor: Volatility Brewing

Friday, 19th November, 2021

1/ Stock indexes close with mixed results  

2/ Macy’s surprises analysts and investors  

3/ Traders preparing to exit Zoom Communications

4/ The bottom line

1/ Stock Indexes Close with Mixed Results  

Markets churned on Friday as global COVID-19 fears weighed on indexes, but losses were pared by the technology sector. The iShares Russell 2000 ETF (IWM) led the way lower, falling 0.9%. State Street’s Dow Jones Industrial Average ETF (DIA) shed 0.7%, while the S&P 500 Index ETF (SPY) fell 0.1%, after hitting resistance intraday. Breaking the trend was Invesco’s Nasdaq 100 ETF (QQQ), which rallied 0.5% to a new high.  

Austria announced early in the day that, due to a spike in COVID-19 cases, it would re-enter a full national lockdown. Airlines and travel stocks took the brunt of the beating. The energy sector slid amid concerns related to new lockdown orders that hurt oil prices.  

The chart below compares the S&P 500 Index (SPX) with the CBOE Volatility Index (VIX). The VIX is based on option pricing for SPX and can be seen as an overall gauge of investor fear. Prices fall with increased volatility, so the VIX and SPX tend to have an inverse relationship. 

The recent upward trend of SPX has not resulted in a correlated downward move in the VIX. This could be seen as an increase in overall fear toward the health of the markets and could provide higher volatility as SPX continues to set new highs. This may be a warning sign that market makers could be foretelling a pullback in SPX, with option pricing increasing.  

2/ Macy’s Surprises Analysts and Investors  

Investors snapped up shares of Macy’s (M) after the company soundly beat analyst profit expectations for the third quarter. Analysts expected the department store retailer to announce $0.31 in earnings per share (EPS) and $5.2 billion in revenue. Macy’s reported $1.23 in EPS to go with $5.4 billion in revenue. The company raised guidance for the full year and investors piled in, pushing M shares up 21% on the day of earnings.  

The chart below compares the recent performance of M with State Street’s Retail Sector ETF (XRT). Before earnings Macy’s stock had been on a relative upward trend, outpacing its sector. Buoyed by two strong earnings reports in a row, M has gained 217% year-to-date, compared to XRT’s 59% gain in the same period.  

Option traders appear to be positioned for protecting themselves against a move lower in the near term. The open interest and recent trading volumes for M are nearly evenly split between calls and puts. While open interest remains elevated, put option open interest is much higher than compared to the last 52-week period. Put options are also more expensive than call options after accounting for intrinsic value.  

3/ Traders Preparing to Exit Zoom Communications

The share price of Zoom Video Communications (ZM) has fallen to a below-average range, just below its 20-day moving average, ahead of the company’s fiscal third quarter earnings announcement on Monday. Analysts forecast the company to report $1.10 in EPS and $1.02 billion in revenue. ZM’s recent share price decline can be attributed to concerns about the company’s short-term growth as more people transition back to working at the office.  

Option traders appear to be betting on a negative earnings surprise from ZM. That’s because out of the money put option open interest declines at a much slower rate than out of the money call option open interest. Over the last five trading days, option order flow has shifted from bullish to bearish, coinciding with a short-term downward trend.  

Investors could be anticipating similar share price drop that ZM experienced after the previous quarters’ earnings, which saw ZM stock sell off by 16%.  

4/ The Bottom Line 

Stock indexes showed mixed results with the Nasdaq 100 closing higher and the Dow closing lower. The VIX suggests some investors are showing increased nervousness. That didn’t stop buyers from rushing into Macy’s stock, but it likely made them more nervous about ZM shares.  

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Originally posted on 19th November, 2021